Tuesday, July 13, 2010

Understanding The Downsides Of Mortgage Refinance

Understanding The Downsides Of Mortgage Refinance

Refinancing is a valid option for troubled homeowners. But you have to understand that this loan has several pitfalls. Make sure to scrutinize the loan first so that you can get a good deal from lenders.

Like most decisions that you have to make, refinancing your mortgage has positive and negative aspects. For one thing, pitfalls still abound even if the current interest rates are lower. The good news is that most of the downsides of refinancing can be avoided by carefully choosing a loan that you will close.

Refinancing Costs More

One of the biggest disadvantages of refinancing is that it costs money. Basically, you are getting a new mortgage to pay off the first one. This means you have to pay all the closing costs again. Most probably, you will also have to pay for a new appraisal because lenders want to know if your home still has value.

Depending on where you live, refinancing will cost 2 to 6 percent of the amount borrowed. The key is to make sure that you will have enough savings by refinancing in order to offset the cost of the loan.

Always Get the Lowest Interest to Save More

Getting an interest rate that is not low enough is a real hazard when taking out a mortgage refinance. You will have a hard time recovering the cost of the new loan if its interest rate is only half percentage point lower than the rates of the original loan.

The key is to get a loan that will at least save you a full percent or more. This way, you will be able to recoup your expenses in a short period which makes refinancing a worthwhile option.

Hidden Factors to Look For

The PMI or private mortgage insurance is a common potential problem that you might overlook if you refinance. You can avoid paying the PMI by investing at least 20 percent down payment on your home or acquiring the same percentage in equity.

But if you refinance, the PMI may rear its ugly head again because the falling prices of homes may have decreased your equity by 20 percent. So you need to pay the PMI on top of the regular interest rate of the new loan.

Simple changes in the terms of the loan can also be a potential source of problems. One of the most common problems could be a change in the prepayment penalty conditions. This may last for several years which could complicate future efforts to pay off the mortgage early or when you sell your home.

Lastly, you have to be smart when getting adjustable rate mortgage. It is true that you can save a lot if you switch from fixed rate to ARM. However, you have to ensure that you will not get stuck with this type of loan if the rates start to reset in the future.

Refinancing provides a way out for troubled homeowners. However, be sure to understand the downsides of this type of loan. This way, you can properly weigh your options so that you can make a sound decision.

By: Rob K. Blake

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